I have watched your discussion with Robert Murphy and I have to conclude that I liked it much more than most discussions of natural rights libetarians with anyone else. Maybe it is so because it was almost entirely about economics and very little about moral philosophy, or maybe Robert Murphy is just a person who does not always assume the other side is stupid or evil which is the case of many rothbardian libertarians :)

I just had a moment of reflection when I head the guy who rambled on about how crappy the social sciencies are (and I gather that he thinks we should simply forget about them since they are a waste of time). A moment of reflection, because this was exactly my view of the world some five years ago...as strange as that might sound, studying mathematics (and probability above all) has been one of the major reasons for me to reject those views as simplistic.

And on that note I would like to conclude with a joke (or I don't know how else to call it) about mathematics and physics:

If you want to know something that is true and don't care about whether it is useful or not, study mathematics. If you want to know something that is not true, but what can tell you at least something about the real world, study physics.

Natural sciences are close to the absolute "truth" of mathematics (which really lives only in the world of ideas where it can be absolutely true) than the social ones, but the natural sciences cannot tell you anything about society.

I watched your debate with Robert Murphy on economic methodology. It was an interesting debate, even if it is clear what the sensible approach is. :)

Anyhow, at one point you made a side remark mentioning some physicists whose theories assumed objects having intentions. (I think you said it was in the 18th century? but I could be mistaken) It got me curious. Do you have any reference I can look up?

Ricardo: I believe it is a figure of speech used to abbreviate some rather complex sentences. Same for example as with genes as Dawkins uses it - he talks about "selfish genes" and their "intentions" when there is of course no such thing, but the whole gene machinery works "as if genes had intentions".

And when you have a pendulum for instance (to pick a classical 18th century physics problem), you can say the pendulum "wants" to reach a stable state. It is practical to say that instead of "due to friction and several other forces that are simultaneously applied on the pendulum, it will be converging to the stable state". Of course as in the case of genes, you need to make sure that the metaphor has not got you too far and that you can still "translate" it to "real" terms.

Anyway, the moment Murphy mentioned his euclidean geometry analogy, I smiled because it was almost certain a physicist would not let that go without a comment :)

But as I mentioned above - Murphy turned out to be pretty decent and sensible compared to a lot of other austrians/rothbardians I have either talked to myself or listened to talking.

I was watching one of your talks (the Consequentialist Theory one), and during the comments, someone asked you about the dangers, in the world of strong encryption, of Murder, inc. being used to bully protection agencies by murdering or threatening to murder their CEO or other executives. You suggested using guards for the CEO and the like, but I think in that scenario there is a more elegant solution.

Basically, encryption can act as both a sword and a shield. The problem is that encryption might be used to anonymously assassinate the CEO; the solution is to use encryption to protect him. In that kind of society, there's no reason a *person* has to be a CEO, since an online persona will suffice.

You've already described elsewhere how public key encryption and digital signatures can be used to establish a reputation. If assassinations were a serious threat, then companies could be managed anonymously by personas with established reputations. In this world, hiring an assassin is easy, but determining who to assassinate is next to impossible. Of course, people can still assassinate the rank-and-file, since they must act publicly to enforce rights. But that won't have any more effect on policy than randomly shooting cops would have on government policy.

There seems to be a difference in the notion of rationality between the two sides. Mises includes mistakes, cognitive and knowledge limitations, etc in rationality. Making a mistake, being emotional, short-sighted or tempted does not make you irrational. You are rational to eat the cake even though you wish to diet, because at the time you eat the cake, eating it was subjectively correct means to act on your preference (at that time).On the other hand, the Chicago approach of "perfect rationality" and "rational expectations" seems a stronger assumption (which then needs to be fixed to account for mistakes and such).Maybe this warrants further drill-down. Personally, I am more receptive to the Austrian view of rationality, as it assumes less.

On method, can you give an example of economic theory/law (deduced from axioms) which was invalidated by evidence? If the answer is "none", your view is fairly closes to Bob's (I think Bob would say "none, if the theory is logically sound and realistic axioms then it cannot be invalidated").Where Austrians recognize theory as insufficient is when there are two or more conflicting effects. Theory cannot say which effect is more intense. Austrians would probably claim that such intensity cannot be repeatably learned from evidence (why expect the same mix next time?). The study of those is economic history and forecasting, not "core" economics (my term).

1) You were asking why don't entrepreneurs outsmart the business cycle? There is a good essay addressing that question, see http://www.mises.org/daily/2673

2) Regarding experiments using virtual reality, what makes you confident that people behave the same in virtual reality? For one thing, I would expect time preference to be different, not to mention risk-aversion (fear of dying). You don't behave in Second Life exactly as you would in the "first life".

3) You raised three challenges for Bob Murphy which theory alone could not answer. One of them was that theory/reasoning alone cannot support free-trade. If you think so, then on what basis you support free-trade? If empirical evidence is that basis, aren't you subject to the argument that "this time things are different" (and every new instance could be different)?

Regarding the discussion with Bob Murphy, I think that both sides accept that economics starts from assumptions that might be false, despite the "a priori" label applied to Austrian theory. I suspect that the real difference between you and Murphy would be that in the face of mounting contrary evidence (or, if you will, "studies of economic history"), he would continue to hold to the Austrian theory of the cause of, say, the Great Depression; arguing that because of the possibility of this or that counter-factual, Austrian theory has not been *proven* false. You, on the other hand, would, I think, abandon the "Chicago theory" of the Great Depression at some point in a growing body evidence against, while granting that the theory *might* still be true.

And, I further conjecture, that this is because Bob Murphy would think that, were the Austrian theory proven wrong, he would have to give up some central moral premise he does not want to give up, while, you, on the other hand, have a more nuanced view of the relation between facts and values.

Julien: I was not asked so I probably should not answer, but I can't help it (and hopefully professor Friedman will correct me if I am wrong).

Theory needs to be validated rather than invalidated. You can come up with a nice theory, but if its implications sharply differ from reality, it is not very plausible...there is no such thing as certainty in the real world, but you can have approximations that are good or ones that are bad.

It seems to me that Austrians more or less detest anything that is not absolute truth. However you cannot tell anything about the real world with that approach. I often find it funny when I see how physicists "abuse" mathematics, but if they want to say anything about the real world, they cannot just derive everything from axioms the same way mathematicians do. They use the mathematical theory a lot, because once they assume this and that, the mathematics leads to these and those conclusions. But mathematical theory by itself cannot tell anything about the real world (I study mathematics by the way, so no bias against maths on my side :) ). In the words of one servant of the knights of the round table from Monty python and the holy grail : "It's only a model" (he reffered to Camelot).

And so is the economic theory - only a model. We can see if it is a good model if we see how well it describes the real world (not only how well it fits the data from the past but even more importantly how well it fits the data that were unknown when the model was created).

Murhy said something like this"look how the mainstream economists use the same methods the natural scientists do and what stupid arguments they have." Well, yes I think a lot of what Krugman says for example is quite stupid (or more precisely it is very biased towards his political views and he jumps to the "right" conclusions all too easy). But there are probably quite a few physicists who come up something stupid too. The fact that someone is not good at something does not imply the method is bad in principle.

Gordon: I second your view of the discinction, namely the second paragraph. From my experience a lot of Austrians are pretty dogmatic about some things, because they see it so that "if one card is taken away, the whole card house collapses". To Murphy's credit, he does not hold the "fractional reserve banking is fraud" position. I was surprised to find out that this position even exists among people who call themselves libertarians (when I read an article at mises.cz by one of its proponents some 3-4 months ago) and even that a lot of Austrians go to great lenghts to justify something as bizzare (and anti-free trade in my opinion) as that. I cannot help but to feel they only do it because "Rothbard said so". And then I cannot help but to see the parallels with objectivists...(even though they seem to be even more dogmatic about Ayn Rand than those austrians are about Rothbard).

Regarding the question of validating or invalidating theory:I believe that knowledge is governed by probability theory (which Bayesian method formalizes, see initial chapters of E.T. Jaynes' excellent book). One application is to use evidence to update beliefs and compare two competing theories. In that framework, you never prove a theory (probability=1), you only eliminate the least likely ones by comparison.

But another application is possible. If you have certain or almost certain knowledge (p=1 or 0.99), you can also derive conclusions from it. Logic is the application of Bayesian reasoning on certain and impossible probabilities (p=1 and p=0). The Bayesian formula both applies to updating beliefs from evidence and deriving high-certainty beliefs from prior high-certainty beliefs.

My point is that both forms of knowledge (ruling out theories by evidence and deducting conclusions from certain facts) are rigorous and valid.

So for me, the discussion comes down to axioms or assumptions, and whether the Austrian axioms are certain enough.Austrians assume that "men act purposefully". That seems a more reasonable assumption than "perfect rationality". Weaker assumptions/axioms are better than more heroic ones. If the axiom seems obvious, things are even better (high-certainty).

If you can argue that the definitions or axioms are insufficient or flawed in a specific way (what about individuals making mistakes, or having limited information, or having conflicting preferences?), Austrians would certainly listen. If you can't point out a specific flaw (personally I couldn't), then I don't see how to avoid the conclusions.

Most of the Austrian conclusions are weak in one sense (no quantitative or timing aspect, no definite conclusion when two opposite effects superimpose), but they are strong in another sense (this change will have such and such directional effect compared to the alternative).Given those nuances, saying that Austrians detest anything but absolute truth seems incorrect and it implies motive or unjustified bias. The question is whether the strong conclusions teach Austrians to appreciate absolute truths, or whether they have a bias for absolutes before they become Austrians. I have my own biases, but I do think people and scientists are attracted to simplicity and elegance, and justifiably so (Occam's Razor).

Austrians do not seem to believe probabilities have any place in knowledge: http://econfaculty.gmu.edu/bcaplan/whyaust.htm

Wrt rationality, I did a course in micro (as well as macro) and I do not understand your point. We do have to assume things like "people prefer to pay less than more" in order to deduce downward-slope demand curves and all that. And we did study exceptions to that, such as luxury goods, where a high price brings higher demand. AFAIK Austrians are creating a strawman. But do examplify the point you're trying to make if you will.

Anyhow, as a computer scientist who is doing a graduation in applied mathematics, I see often how only when you go on to actually implement something on Matlab (or whatever) you find yourself scratching your heard, and discovering you actually didn't think through the theory or the model. As David Friedman pointed out, you derive your models from reasoning (of course!), but only when you go on expressing them mathematically (and doing simulations or possibly making predictions using them), it gives you the discipline to understand how you made some errors in your thinking.

Sorry for lengthy reply. I appreciate the question and I found it useful for myself to see if I can articulate a convincing point ;-)

Maybe I missed a section, but Caplan's essay says nothing about probabilities.I do recollect something about Mises and the meaning of probabilities (vs his brother). I believe the main contention was about singular events. From my reading, Mises agrees that individuals assign subjective degrees of confidence to uncertain events, but it is not obvious that they should be able to assign numerical values to those. I think that was the issue.Mises may have been mistaken on this, or simply misled by the frequentist/set interpretation of probabilities. It is unfortunately still taught (I only learned about the knowledge view of probabilities after college).A quick search on mises.org showed articles on probability (such as http://mises.org/daily/4979 ), which emphasize the subjective nature of probabilities. That is consistent with my understanding (again I recommend ET Jaynes on this topic).

Regarding rationality, David Friedman in the discussion with Bob Murphy states in effect that you start with a rational individual as an approximation, draw some conclusions, then address exceptions. He does not define rationality in the process.On the other hand, Mises's explains why all actions are rational: the actor chooses his most preferred end and uses means which he thinks will achieve that end. The end and the means are rational in that sense. This weak definition of (subjective) rationality already encompasses weird and changing preferences, mistaken means and limited information. It doesn't require exceptions, just subjectivity.The stronger view of rationality (or perfect rationality) is not needed to reach useful conclusions and it actually weakens those conclusions.I hope I am portraying both positions correctly. They do appear distinct to me.

Regarding your last point, you are completely correct to scrutinize your assumptions and logic. Just like mathematical theorems (geometry), Austrian praxeology requires scrutiny too. Others walk through the steps and point out flaws (missing link, unseen effect). You don't need mathematical symbols to do that if you have clear definitions (subject to review too, again see geometry). The math notation can obfuscate rather than clarify. See the "Landsburg multiplier" for an example of misuse of maths: http://www.thebigquestions.com/2013/06/25/the-landsburg-multiplier-how-to-make-everyone-rich/

By the way, Austrians do look at historical evidence (see Rothbard), which also acts as discipline. But that analysis is not mathematical (no regressions for instance), as Austrians recognize (humbly ;-) that economics cannot make quantitative predictions. To make predictions we would need some constants (like G or c in physics).See my question earlier to David Friedman about an example of empirical study (regression or such) which invalidated economic theory (beyond the flawed "perfect rationality" assumption, see above).

Thanks for the kind words. I have two quick responses to two of your points from above:

(1) In college I took a course in non-Euclidean geometry, and I almost minored in physics. I have no idea why Friedman or you thought I was saying the physical universe was Euclidean. I said if a student in 7th grade geometry class tried to do a proof by measuring a bunch of triangles, the teacher would have to correct him. And yet, even though geometry itself is not empirical, but deductive, nobody doubts that it's useful to teach kids the Pythagorean theorem.

(2) You didn't like my argument about mainstream economics, saying there are some dumb physicists too and yet we don't throw out the method of the natural sciences in physics. OK, but are there bad (not dumb) physicists filling the ranks of Harvard, Princeton, Yale, and on all the top government spots? No. Physics clearly works, whereas the layperson could be forgiven for thinking that professional economists are a bunch of charlatans. There is something qualitatively different between the two fields, even looking at the "leaders" in the fields and not an isolated idiot.

As it turns out, my field of study in mathematics is actually probability theory, so that may be the reason I prefer the first approach (not of course when the theory is devised, that would be very bad mathematics).

There is a problem with the second one though. In order to be sure about whether something is nearly almost sure (almost sure is a technical term in probability theory I don't want to use since it means P=1)) you have to check with the real world. The theory by itself can tell you absolutely nothing about that.

Now, the problem with axioms such as that people (tend to) try to reach their goals is, as D. Friedman pointed out in the debate, that it does not really tell you almost anything. You don't know what the people's objectives are, and you could come up with very bizzare conclusions that you cannot rule out based entirely on economic theory. It is nice that people tend to try to reach their objectives, but without the insight we have from real world evidence, people's objectives could for instance simply be to live in a cruel dictatorship (let's say they prefer the tiny chance of being the supreme overlord with power over everyone else or simply that most people actually want to be slaves and there just have to be a few poor fellows who end up with the lousy job of being slavers and dictators).

I am not sure about the definitions of rationality by Mises and (let's say most) Chicago economists. That is whether they are the way you describe them, so I will leave that for someone more knowledgeable in this area to answer. In principle - yes, if you have two competing theories that are equally good (that is important) at describing the real world (approximating would be a better word), then it is reasonable to pick the simpler one. Yet, riemannian geometry (which Einstein's relativity is based on) is much more complex than the neat orthogonal euclidean world and still we have a use for that, since it describes the real world better in some situations (in others they are equally good...which is why euclidean geometry is still useful today, when it makes equally good approximations, it is better to use it, since it is simpler). Essentially, Occam's razor does not mean "always choose the simplest ideas".

"Maybe I missed a section, but Caplan's essay says nothing about probabilities."

Yes, so I see. Sorry about that. I must have read it somewhere else. :-|

The thing about rationality. I don't think in micro courses a lot of time and care is spent on this, as Austrians do. But yeah, the idea is that economic actors have preferences and all that, and economic professors fast-forward to more mathematical analysis of utility and then social welfare functions. But the ideas underneath are those. In the micro1 exam, there was even a question about why preferences are said to be ordinal rather than cardinal. The professors said I was the only that got it right, and I was not even an econ student. That means they may brush it too fast, and it is a black spot in econ education, but if you look at the books, it's pretty much what I have seen Austrians saying. They rarely spent much time on it though.

Robert Murphy writes:"the layperson could be forgiven for thinking that professional economists are a bunch of charlatans"

Nice to see you here. My understanding is that this is a bit too harsh. And David Friedman was a bit harsh on macro as well. It is my understanding that we do have solid and interesting concepts in macro too that go a long way to understand the economy, such as sticky prices and the equation of exchange. There are a bunch of models whose applicability might be doable. But those two concepts alone seem to help me understand what is going on here in Europe.

1) Maybe there is a misunderstanding. Of course it would be silly for the student to try to prove that the mathematics is wrong or right by measuring triangles in the real world. But that is because mathematics does not live in the real world. It lives in its own world, a world that is created and built on the axioms of the theory. There it is absolutely true and perfect. But we do not live in that world, and nor do we live in the world of economic theory. A good teacher should tell the 7th grade student exactly that. He should go on to say that euclidean geometry (or any other mathematical theory) is not a perfect description of the world and it cannot be, it is "only a model". And that in real world we have to check if the reality is reasonably well approximated by the reality of the perfect world of the theory. In the case of Euclidean geometry it turns out that for most purposes it is. But try using Euclidean geometry to synchronize GPS satellites with your device and it will start making huge errors.

2) I think it really only shows that economics has do deal with more complex and harder to grasp problems. It also has a problem that I mentioned about Krugman - it is all too easy to have some conclusions you want to reach in economics and reach them hastily. I posted a link to an article from NY Times in the comments at this blog some time ago. It was by a psychologist, Jonathan Haidt and he basically summarizes this problem social sciences can have:(http://www.nytimes.com/2011/02/08/science/08tier.html?_r=2&)

"Anywhere in the world that social psychologists see women or minorities underrepresented by a factor of two or three, our minds jump to discrimination as the explanation,” said Dr. Haidt, who called himself a longtime liberal turned centrist. “But when we find out that conservatives are underrepresented among us by a factor of more than 100, suddenly everyone finds it quite easy to generate alternate explanations."

And that is the case of economics as well. I don't think this exists in physics or other natural sciences really (or it does in a very weak way - if you've been working on a theory for 10 years, you kind of wish it does not turn out to be bogus). But it is a problem not of the method, but of (some) economists who mix their professional work with their political views a little bit too much. And then of course there is an outside political pressure to a certain point as well - you want to be Obama's economic advisor? Well, you better not write anything bad about the fiscal stimulus. You want to be a popular economist who writes collumns in NYT? Again, you should conform with the newspaper's ideology. So to summarize it - there are problems of motivation and there are no doubt problems arising from the fact that economists deal with much more complex systems than physicists do. But I don't see any fundamental problems with using in principle the same method as physicists do.

"[Math] lives in its own world, a world that is created and built on the axioms of the theory."

Yes, and I would argue this is something other scientists would be intelligent to avoid, rather than to revel on.

It is a drudging task to see if someone is being really smart or really stupid, and we have a plethora of notation to help us go through that. When you get to more applied mathematics (like physics .. jk :p), you would be a fool not to check your theories. It is a human-proof way to make sure you thought things through, to quantify factors, and it is sometimes faster too.

Since Bob Murphy has checked in here, I am disappointed that he did not address my claim about the difference between Austrian and Chicago "schools", at least as represented by him and David.

By the way, I also thought that David's initial response to Bob's use of the geometry example was too quick, and missed Bob's point. Indeed, I liked the geometry example so much that I will reuse it to state my claim about the difference. Suppose Bob and David both thought that there was some fundamental consistency between their deep moral beliefs and Euclidean geometry. By this I mean that, by using Euclidean theorems, both found that they could make good arguments for policies supported by their moral views.

Then, my claim is that, if evidence began to accumulate that, although logically consistent, Euclidean geometry does not describe the actual world, Bob would point out that this evidence does not *prove* that Euclidean geometry is not true of the actual world. After all, the evidence for non-Euclideanness itself requires interpretation, contains hidden assumptions, etc., which are contestable.

David, on the other hand, would at some point find a clever way to adopt a non-Euclidean theory without having to change his moral beliefs. (I'm not impugning David's integrity here: no one easily changes their deep moral beliefs, and, the more clever you are, the easier it is to find a way to keep those beliefs consistent with the other things you believe.)

In Edward Teller's memoirs, he discusses the controversy over whether it was possible to build a hydrogen bomb. By his account, a lot of physicists argued that it was not. It sounded from that account as though that was partly because building a hydrogen bomb did involve some serious problems, partly because the physicists in question did not want it to be possible or, if possible, to be done, for fairly obvious reasons.

I think you can see similar patterns now in the controversy over global warming, which is ultimately physical science. People who want other people to believe it is a serious problem have a strong incentive to bias their work in one direction, people with the opposite objective in the other.

"You are rational to eat the cake even though you wish to diet, because at the time you eat the cake, eating it was subjectively correct means to act on your preference (at that time)."

Eating cake in this case might well be "purposeful", but it is not directed at the purpose of dieting. The goal of eating cake and the goal of dieting are in conflict. Is it rational to have conflicting goals?

"On method, can [David] give an example of economic theory/law (deduced from axioms) which was invalidated by evidence?"

You're missing the point. As a piece of reasoning, the, e.g., "Law of Comparative Advantage" is valid. It cannot be invalidated by evidence, any more than the proof of the Pythagorean Theorem can be invalidated by evidence. But there could well be evidence that the proof of the Theorem does not apply to actual world we live in. So, too, for the Law of Comparative Advantage.

"If the answer is "none", your view is fairly closes to Bob's (I think Bob would say "none, if the theory is logically sound and realistic axioms then it cannot be invalidated")."

And that is the problem: are the axioms "realistic"?

In another post, Julian writes:

"If the axiom seems obvious, things are even better (high-certainty)"

High certainty does not make a statement (or axiom) true. The only thing that makes a statement true is correspondence to reality. All sorts of things that "seem obvious" are false.

Regarding high-certainty axioms: feel free to point out un-necessary or brittle axioms in Austrian analysis. Austrians certainly point out what is un-realistic in other schools axioms. :-)

How do you know people's preferences (maybe some want dictatorship)? Only by demonstrated choices. This is why the notion of voluntary choice (picking the option which I perceive to be better with my own will) stands out in Austrian economics. I suspect that is why it leads to libertarianism.

I think my reply to Gordon below also will be applicable to some of your points.

It is rational to have conflicting goals. I want the cake and the money too (or being thin). Preferences are how people decide what is more valuable to them and pick one course of action out of many.

"Are the axioms "realistic"?""there could well be evidence that the proof of the Theorem does not apply to actual world we live in."

Yes, I agree that axioms need to be realistic if the deduction is to be realistic (applicable to the world).

Showing that the axioms Austrians rely on are not realistic would be one way to show that Austrian theory does not apply to the world (you are welcome to it). Note that we have unique insight into human kind and human action by virtue of being human (see Bob Murphy's quote below) which we can leverage too. This is how I argued above why axioms used in some non-Austrian theories aren't realistic (no such thing as perfectly consistent, informed, logical, perfect forecasting human).Let's apply this test to Austrian axioms. Pick examples.

Another way would be to attempt to evaluate the predictions of the theory, but I think that is actually weaker because the world has many overlapping changes (no ceterus paribus kind of isolation). In physics, experiments can isolate the different factors and you can still expect the effect of different factors to be the same once you overlap them again. The example is a coin falling in gravity and in an EM field, you separate and study the two, then combine them. For humans, it is is not clear that experiments which attempt to isolate factors yield results which can be applied in different conditions (because human behavior changes with conditions in ways which rocks don't). Also it is not clear that "constants" discovered in one experiment should carry over to other situations or time.

As Bob Murphy puts is in his essay, Mises' Non-Trivial Insight ( http://mises.org/daily/1304 ): "It's not so much that the method of the natural sciences doesn't work when it comes to human action, but rather that their use would overlook such an incredibly better set of tools that all of us possess."

"How do you know people's preferences (maybe some want dictatorship)? Only by demonstrated choices. This is why the notion of voluntary choice (picking the option which I perceive to be better with my own will) stands out in Austrian economics."

Revealed preference is a cornerstone of economics. Period.

http://en.wikipedia.org/wiki/Revealed_preference

"I suspect that is why it leads to libertarianism."

Studying economics _in_general_ correlates with libertarianism. Bryan Caplan as written extensively on that.

Demonstrated preferences are outside of economic theory, just like what resources are available and other factors which affect decisions.

Austrians can tell you that if preferences or conditions change a certain way (say time preference rises), it will cause such effect ceteris paribus (ie. the natural interest rate will rise compared to otherwise). That is rigorous knowledge of immutable economic law. It does not require knowledge of empirical facts.

But if you try and quantify this effect and superimpose it with other changes (for purpose of forecasting or historical analysis), you enter a different arena or discipline. Why the stark distinction? Because you cannot discover any economic laws that way. That makes it a different category of knowledge.This is basically a problem with any attempt at econometrics. Econometrics require repeatable historical circumstances which cannot be controlled for, assumes human universal invariants and it ignores qualitative dimensions. It has not produced any such constant relationships, and arguably it cannot.

Here is an article by Rothbard on the topic, with a useful quote from Mises (copied below): http://mises.org/daily/6090/

"There are, in the field of economics, no constant relations, and consequently no measurement is possible. If a statistician determines that a rise of 10 percent in the supply of potatoes in Atlantis at a definite time was followed by a fall of 8 percent in the price, he does not establish anything about what happened or may happen with a change in the supply of potatoes in another country or in another time. He has not "measured" the "elasticity of demand" of potatoes. He has established a unique individual historical fact. No intelligent man can doubt that the behavior of men with regard to potatoes and every other commodity is variable. Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions.…

The impracticability of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations.… Economics is not, as … positivists repeat again and again, backward because it is not "quantitative." It is not quantitative and does not measure because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case. Physical events can be interpreted on the ground of our knowledge concerning constant relations established by experiments. Historical events are not open to such an interpretation.…

Experience of economic history is always experience of complex phenomena. It can never convey knowledge of the kind the experimenter abstracts from a laboratory experiment. Statistics is a method for the presentation of historical facts.… The statistics of prices is economic history. The insight that, ceteris paribus, an increase in demand must result in an increase in prices is not derived from experience. Nobody ever was or ever will be in a position to observe a change in one of the market data ceteris paribus. There is no such thing as quantitative economics. All economic quantities we know about are data of economic history.… Nobody is so bold as to maintain that a rise of A percent in the supply of any commodity must always — in every country and at any time — result in a fall of B percent in price. But as no quantitative economist ever ventured to define precisely on the ground of statistical experience the special conditions producing a definite deviation from the ratio A:B, the futility of his endeavors is manifest."

"It is rational to have conflicting goals. I want the cake and the money too (or being thin).Preferences are how people decide what is more valuable to them and pick one course of action out of many."

Why does the fact that you pick one course of action make it "rational" to have conflicting goals?

"Yes, I agree that axioms need to be realistic if the deduction is to be realistic (applicable to the world)."

But axioms do not need to be realistic to be applicable. The Law of Comparative Advantage is stated for two countries and two goods. That is not at all realistic; there are some 200 countries and millions of goods. Is the LCA not "applicable"? On the other hand, axioms can be quite realistic, yet fail to be applicable in some situations, e.g., Euclid's axioms.

"Another way would be to attempt to evaluate the predictions of the theory, but I think that is actually weaker because the world has many overlapping changes (no ceterus paribus kind of isolation). "

And I think it is stronger, because deductions from "realistic" axioms can be false. Being "really careful" about your axioms is no guarantee of the truth of your conclusions.

I'm sorry but I don't agree with this strict approach to data. It is just not true that looking and evidence does not tell you nothing at all. Sure, you have to have in mind that some aspects are unique and "tread carefully". But to say it cannot tell you anything at all is in my opinion just not true. Also, it is not just about looking back. It is also looking forward. I have a theory. It predicts something (such as your example with interest rates). If it runs out that in reality it is consistently giving bad predictions, there is a good reason to check my theory, because it seems I have either too few or too many assumptions that therefore lead to a (in our world) wrong conclusions...and of course there could be logical mistakes as well, but those are easy to fix even without the evidence. I don't say "the interest rate was 0,1% different than it should have been according to the theory" is a reason to change it. There are many factors that have influence and the measurement itself (even in physics) is subject to some degree of error. But we have ways to get around that. A good deal of statistics and probability theory deals with the problem of imprecise measurement. And even if we take the simples approach - A good theory aboout a dice is that each number has a probability 1/6. Well, if I have a particular dice and throw it enough times and it will show that number one comes up more often that in 1/6th of cases, then it is a good idea to "change the theory" for this particular little dice, since the dice is very likely loaded and that is something I did not count with. As you mentioned, the problems in economics suffer from the fact that each time you throw the dice, there are some external factors that influence the outcome as well, which makes it harder to measure if the dice is loaded or not, but not impossible...That is as long as these external random effects are not so predominant that the outcome does not depend on the dice itself almost at all (maybe someone arranges the outcome of the dice manually each time without you knowing it). But I don't think it works this way in economics and if it did, it would actually be a good reason to reject economics completely, because it would not be able to tell us pretty much anything, as the outcomes would depend almost entirely on something else.

Sorry for the delay. I am still thinking about the issue and I appreciate the thoughtful discussion and challenges.

I tend to think that both logic and empirical evidence can derive knowledge. The question is with what relative confidence. Let's say that logic (with very careful and realistic axioms) gives you p=0.99 or even 0.9, and empirical evidence can only shift it by + or - 0.01, then empirical evidence is very weak comparatively. Although human common sense is broadly Bayesian, it is informal and it is hard to quantify such probabilities. It is even harder to identify the priors which lead different people to interpret the same evidence and arguments differently ;-)In that light, you could see the Austrian argument as an informal claim that the boost from empirical evidence is tiny and therefore negligible. I still need to think more to formalize this and make a better argument :-)

It may be useful to consider some experiments as illustration. Feel free to share what are best examples in your mind.

- Minimum wage, rent control, price control literature:Although occasionally studies claim to find a surprise, it seems the only discussion nowadays is really the degree of harm. How many people lose their jobs due to minimum wage? How fast does housing quality degrade under rent control? And so on. First, those quantitative measures cannot be expected to be universal (different place, time, culture). Second, such studies cannot hope to account for qualitative dimensions which are arguably what guides most human decisions.

- Behavioral economics experiments (I'm thinking of those presented in Dan Ariely's books):Economics teaches us that people act relative to their preferences and perception and understanding of the world. We already know that perception and understanding are subjective and flawed compared to objective reality. Although it is interesting, the knowledge aquired is contingent, not fundamental. There is no reason to think that you would get the same results and degrees in different places, time or cultures. Also it tells us nothing about modified experiments.

- I still need to read David Friedman's mideval paper and testFrom my initial thinking from the talk is that if he didn't have high confidence in his theory a priori (by peer review and logical analysis), then the empirical test does little to add. When asked to predict a future situation, there is no reason to think that some key element wasn't missed. In short, he may have been lucky (the simplifications worked, but he wouldn't know when/if they stopped working).

- Great Depression, Great Recession:Those are good examples of not being able to attach much weight to empirical analysis. As the recovery stalled after the 2008 recession, you would read some economists argue that the stimulus was not large enough. Even opponents of the Austrian viewpoint aren't able to use the data to disprove the Austrian analysis. The only sticking point was the degree of inflation. Austrians point out that massive money supply changes lead to significant inflation (ceteris paribus). They also recognize that changing the regulations and requirement for banks can have an opposite effect. So how does one prove this description wrong? How does one empirically verify the Cantillon effect (non neutrality of money)? Even if you ran a controlled experiment in World of Warcraft, how much confidence boost should that result give you?

"Although occasionally studies claim to find a surprise, it seems the only discussion nowadays is really the degree of harm. How many people lose their jobs due to minimum wage?"

It is interesting you mention the minimum wage. Most economists just study elasticizes based on the aggregate theory that higher price => lower demand. In Portugal, for instance, after a sharp minimum wage increase (under Socrates), it was find the employment effects were negligible. But theoretically you can come up with models of individual behavior that lead to higher employment. Notice how the people who are employed _do_ benefit from higher wages, which depending on how the economy is structured could spill off to sectors of less frictional employment. (for instance: people on the minimum wage use more day care facilities which have a high wait employment.)

"Austrians point out that massive money supply changes lead to significant inflation (ceteris paribus). They also recognize that changing the regulations and requirement for banks can have an opposite effect. So how does one prove this description wrong?"

Julien: I am curious. You explain to me what the Austrian theory for how to get out of a depression (defined as periods of high unemployment) and I will hereby explain you what the mainstream view is.

disclaimer: I don't have a degree in economics. AFAIK it all started with Keynes. He was perplexed at how the great depression was taking so long, and prices and wages wouldn't fall to their market equilibrium so everybody would get back to work, houses would be sold, etc, etc. He elaborated a theory based on the assumption that some prices tend to be downward sticky. That means, for whatever reason, wages, house prices, etc don't come down very easily. There are several hypothesis why this is, which usually revolve around people not being fully rational and cannot realize differences between nominal and real prices: firms prefer to layoff rather than risk employees anger by cutting wages, people don't want to wait for someone to buy their house for more than what they paid nominally. Minimum wage and other regulations can also contribute to this in some sectors. Whatever the reason is, the assumption is that of sticky prices. Based on that, you want either want to pump aggregate demand or money supply, and that's where economists start disagreeing. Here in Portugal, we cannot deal with the crisis either way, because of the austerity measures and the central bank being controlled by the Germans.

Your response does not really address what Rothbard wrote. I suspect this is because you are not familiar with the praxeological/thymological distinction that Austrians make. Rothbard wrote extensively about history, and he of course had explanations for what happened based on the data he used.

As for the dice, an unweighted six sided die has a 1/6 chance of landing on any particular side. This does not require empirical testing, as the idea that an unweighted six sided die has a 1/6 chance of landing on a particular side is understood in the definition. If we then throw a die and it turns out that there is not a 1/6 chance for any particular number, there could be other reasons, such as it is a loaded die as you already pointed out. There might be other possibilities. But that doesn't mean that an unweighted six sided die does not have a 1/6 chance of landing on a particular side. It only means that in the real world example there were other factors involved.

A good way of looking at this sort of thing is that the theories involved are abstractions. An abstract unweighted die has a 1/6 chance of landing on a particular side. A concrete die that you throw when gambling at the casino might be weighted.

Anyway, I love reading David Friedman's blog, but it can be difficult to maintain a conversation here because of the comment format. I am happy to respond here and continue a conversation/debate here, but I invite you to join libertyhq.freeforums.org which is the current forum for thelibertyhq.org and where the mises.org community went after the Mises Institute closed its forum.

1) I should not have said "an unweighted six sided die has a 1/6 chance of landing on any particular side". Instead I should have said "an equally weighted six sided die has a 1/6 chance of landing on any particular side". I think my meaning should have been understood, but I think this restatement is more accurate.

2) Regarding Tibor's response to Julien about Rothbard, Rothbard did not say that statistics "cannot tell you anything at all". Not all Austrians have considered praxeology the defining aspect of Austrian economics, though I think it is safe to say that almost all, if not all Austrians, do currently believe it is the case. The point of making a distinction between praxeology and thymology is to separate theory from the application of theory. Praxeological claims are theoretical abstractions.

Consider this basic praxeological claim: "Whenever two people A and B engage in a voluntary exchange, they must both expect to profit from it." In order to understand this claim, we need to make sure that we are on the same page about certain other foundational concepts. In Austrian economics, action is rational behavior, where rational is defined as using a mean or means to achieve an end. Now, the concept of exchange itself implies using means to achieve an end, specifically trading one thing for another. So the above statement is necessarily true. Certainly it is possible that one or both people could regret the exchange after the fact, and it is possible that one or both people could be mistaken as to whether or not the exchange will in fact profit them, but both must expect to profit from it (monetarily or psychologically, though Austrians sometimes say psychically instead of psychologically).

The claim above itself does not reveal much in terms of economics. It is a foundational claim in praxeology. Other claims are built on top of it. It is a claim made about humans in the abstract. Whether or not it applies to any given real world scenario is a thymological claim in terms of Austrian economics. It is up to the observer to decide when and where it applies. If you observe a man give money to a cashier and receive an apple in return, you need to make sense of the scenario. It is possible that this could be a daily ritual and both intend on sacrificing the apple and money on an alter, and it is also possible that one person is exchanging money for an apple and the other is exchanging an apple for money.

You need theory in order to make sense of the situation. Praxeology is the science of (human) action, whereas catallactics is the science of exchange - though most Austrians just use the more common word "economics" instead. So maybe the two men are engaging in a ritual, maybe they are engaging in exchange. The theory of exchange is separate; as I said, it is an abstraction.

If I remember correctly, in the talk between Friedman and Murphy, Murphy explained that a state might set a price control, and that while we can make certain claims in the abstract about what happens as a result of different price controls ceteris paribus, in the real world there might be a decline in demand thus there might be a different outcome than in an abstract scenario.

I'm not a physicist, so perhaps this is not a valid analogy, but I think it works: Think of the economic abstract theories as the claims that physicists make about objects in a vacuum. The point is to eliminate the variables in order to understand the theories. In the real world, or at least on Earth, objects do not move about in a vacuum, but that does not mean that the theories about objects in a vacuum are incorrect or useless.

Anyway, I think I am just rambling at this point. Hopefully there is something in there worth considering.

I have subsequently found an essay by Bryan Caplan (http://econfaculty.gmu.edu/bcaplan/whyaust.htm) that, while focused on Bryan's objections to Austrian economics, is relevant to the differences between the Austrian and Chicago "schools". (I think this is also relevant because David has not made any claim to have made a detailed study of Austrian economics, while Bryan clearly has studied it.) I note that one of Bryan's points is that econometrics cannot "test" a theory (at least, he says of that criticism "Fair enough"). I would not be quite so accommodating as Bryan, but, even so, he points out a very important role for econometrics even if you grant the criticism.

Economics theory, as a deduction from axioms, of course has unassailable conclusions *if* the reasoning is correct. But to assert that you can only test the applicability of those conclusions to the real world by examining their underlying axioms for soundness is futile. All sorts of arguments incompatible are consistent and even plausible.

Beautiful! Since you didn't ask me for empirical studies to prove those points, you're Austrian in terms of methodology. Those points are obviously true a priori. Those mechanisms exist in the real world and the overlap in complex ways. But if you know they are there, you can analyze the cause and effects in the real world.

For clarification, my point above was that even Krugman's critique which supposedly proves Austrians wrong empirically (look, no hyper-inflation) fails. The analysis remains sound, but overlapping changes steer the result in a different direction. Note however, even without hyper-inflation, Austrian economics shows that there are hidden effects of the printing of a specific kind of money (hard money from the Fed).

Re: minimum wageAustrians recognize that some people gain (the minimum wage is below their productivity and they remain employed). And also that some people lose (loss of employment opportunities). Austrians do not claim to know the degree of elasticity. Further they claim it is not knowable in any scientific sense. (That's the more radical claim)Why would you think that the Portugal result should apply elsewhere or at different times?

How strongly do you believe in the method of the Portugal analysis? Two issues I see: 1) how long do you expect the hike in minimum wage to translate into higher unemployement (the part which you called negligible)?2) are the bad effects of the hike camouflaged by other policies which cause high youth unemployement (I could only find data on youth category, not the teenage category which is even more vulnerable)?

Re: Great DepressionThis could take long and presumes some understanding of how the economy works and develops in normal times. I'll give you a simplified outline based on my understanding (I attended Mises University in 2009 and have read more on the topic since then).

The Austrian interpretation of the depression starts before 1929. The bust grows from a special kind of boom (not normal economic growth). Monetary inflation and credit expansion by government (Fed, changes in fractional reserve rules) misled consumers and producers to discoordinated inter-temporal allocation decisions (normally more credit becomes available because the time preference of people shifted). Producers engaged in longer production processes (investments, building factories, etc) than they should have (because of rigged price signals). Also, there were other policies which made the market more brittle (restrictions on branch banking comes to mind) and encouraged risk.

The reality of those mistakes becomes visible at some point and the bust starts. Note that many resources have been wasted in the process (it's not that easy to unbuild a factory and you cannot recover the wasted labor). We are poorer than otherwise (wasted capital) so capital and savings have to be rebuilt. Bad decisions have to be undone (close the wasted factory, sell it at liquidation price and the buyer tries to repurpose it for profitable production).

In previous depressions, the corrective process of market activities (discovering what is economically worthwhile and efficient) took place rather quickly (12-18 months). Austrians like to point out the 1920-21 depression which had many similar characteristics to the start of the Great Depressions. Those processes are normal market processes which tend to correct mistakes (companies that make bad decisions lose resources, those that make good decisions expand, prices and profits/losses guide the discovery process). Then, the question is not how did we recover from the Depression, but why did it take so long that time.

Austrians have a few ideas on that (policies which adversely affect the functioning of the market). It turns out that when you look at the history many of them where uniquely put in place during the Great Depression (unlike previous depressions). Some examples: trying to hold wages high, increase public spending, putting price controls in place, regulating industry, creating welfare programs. All those changes also created additional uncertainty which make it even harder than otherwise for entrepreneurs to plan effectively.

I hope I did the ABCT (Austrian Business Cycle Theory) justice. The main point that Austrians bring to the table is looking back from the bust. The harm actually took place during the boom. There was an illusion of wealth (usually resulting from price control on the interest rate) which cannot sustain and will be reveal (sooner or later). When it is, people start taking corrective actions based on reality.

"accusing someone of not understanding Austrian economics is not a logical fallacy"

I did not intend for that to mark the finding of a fallacy; my (hidden) point was that it is all too easy to claim that an opponent does not understand your view, rather than to charitably reformulate your opponent's claims.

However, in quickly scanning a few of the replies, while I found some academic snarkiness, it does not rise to the level of "ad hominem". Also, on reflection, my objection about "understanding" was not well formulated; it can indeed be reasonable to claim lack of understanding (even though Caplan gets some praise from Block on this), even if it could sometimes be a cop out. So, I will declare my claim to be false or not very testable!

But the links include a reply by Caplan, which (among other things) uses his Austrian opponents' exact words to point out a serious weakness in their position. And this is their various claims that we cannot *know* things about other minds, apparently simply because we don't have certainty. This fits well with the view that we cannot test internally consistent theories against experience; and both are wrong.

This is a good first approximation, and this is what I studied in micro.

One point I was trying to make is that an armchair economist can come up with theories where the wage rate may lead to higher employment. Just imagine cases where the demand function for minimum wage workers is different from the rest of the workers. Let's say, there is high wait unemployment in day care, and that minimum wage workers have more children and, with the wage increase, they spend more on daycare. Done.

There are no absolutes in human behavior. There are all kinds of effects that can go into different directions. This is why we base our models in introspection and the study of the economy.

"Austrians do not claim to know the degree of elasticity.Further they claim it is not knowable in any scientific sense. (That's the more radical claim)Why would you think that the Portugal result should apply elsewhere or at different times?"

Not knowable? We are not able to measure elasticities with the same precision physicists measure gravity. But so what, statistics has tools to control for that.

About me being Austrian in methodology. I am graduating in mathematics, and I am just starting an internship in a bank (in analytics). I have done modeling, not only in economics, but also in such areas as biology and management. I also did some economic classes. We start discussing how to tackle problems using introspection. "Let's model car sales. Some people are early adopters. Others buy because others have them. Most won't buy when a new version is expected. Etc, etc." Then you add any complexity you can think of -- and remove it right away if it does not increase accuracy substantially (nobody wants bloat). You must use statistics at some point to measure if your marginal theorization makes sense. In banks this process is automatized by making computers build models (using artificial intelligence .. computers basically come up and test millions of random theories against your training data and you use whatever worked best, and then go on to make some millions). If am an Austrian, then there isn't much difference really between the camps. Those folks at the Mises school are overblowing any differences.

"an armchair economist can come up with theories where the wage rate may lead to higher employment"

ooops. s/the wage rate/higher minimum wage rate

By the way, Julien. I understand where you are coming from. I lost nearly a year studying Austrian economics, because of Peter Schiff, Ron Paul & all that. I graduated in Computer Science with honors, but then I chose to go into Applied Mathematics, in no small reason because of my infatuation for economics. Dealing with mathematicians made me a great appreciater of the scientific method. Proving theories is hell, and you cannot do that on the fly. You sometimes spend days making sense of a single paragraph. When building dynamic models (which is what most economics is about), you can and should quantify (why the hell not? you are only making your life harder). Anyhow, I only see good and bad economics now, as everybody else who is actually trying to understand the world, not bickering about it. Wrt macro. The interest rate distortion being problematic for not reflecting the time preference of savers is of little explanation value, as Friedman points in the video. I also became skeptical about Austrians because of their utter unability (or unwillingness) to explain sticky prices and the rest of the ideas coming from Keynes. It's as if they have an agenda.